First-year economic question

[|ll|lll|]

Suppose that a market is perfectly competitive and each firm in the industry is making a positive profit in the short run. If this is a constant cost industry, we would expect the long run market supply curve to be:
a) more elastic than the short run supply curve
b) less elastic than the short run supply curve
c) perfectly inelastic
d) perfectly elastic

Relatively straightforward question, but I can't be 100% sure if my answer is right

Thanks in advance

[Reckoner]

A constant cost industry has a long run supply curve that is horizontal, hence d. However it most cases a would be correct too, as supply is typically more elastic in the long run. The only case that a would not be correct when d is, is when the short run supply curve is also perfectly elastic. But d is the best answer.

[Daenerys Targaryen]

is the area under a MC curve the total cost? or is MC at a q marginal to a base? or is MC accumulative?

(... same qu to MR and revenue but i guess it will be the same)

ty

[|ll|lll|]

A constant cost industry has a long run supply curve that is horizontal, hence d. However it most cases a would be correct too, as supply is typically more elastic in the long run. The only case that a would not be correct when d is, is when the short run supply curve is also perfectly elastic. But d is the best answer.

Thanks Reckoner. But by constant curve, does this mean that marginal curve will be completely flat? Thus, the short run supply curve will also always be perfectly elastic?

Also, in general, when is short run supply curve more elastic than long run supply curve? (Something raised by my lecturer, but never discussed.)
(There really needs to exist a forum/discussion board for this subject...)

Not expecting anyone to answer the entire question (I know everyone has exams...)
But just need help as to how the demand curve looks like. Will it be perfectly elastic or inelastic?
I know the supply curve will be perfectly elastic, but since everyone can purchase only one phone and at a maximum price, wouldn't the demand curve be perfectly elastic too...?!

[Reckoner]

Thanks Reckoner. But by constant curve, does this mean that marginal curve will be completely flat? Thus, the short run supply curve will also always be perfectly elastic?

A constant cost industry has horizontal (perfectly elastic) long run supply curve. The short run supply curve/marginal cost curve may or may not be perfectly elastic too.

In general, supply is more elastic in the long run, because in the short run the amount of capital that you have is fixed, so the output decision of each firm is somewhat restricted. In the long run however, you can change the amount of capital that you have, and in turn have more flexibility in the amount that you produce. This is due to cost minimising capital and labour ratios that are more second year stuff, so no need to know it in any more depth. 

The demand curve will be a vertical line at Q=50, right up until P=50. This is because for all prices below $50, everyone will be willing to buy one and only one phone, so 50 will be demanded for all prices less than or equal to 50.

But for prices above $50, how many people are going to want to buy a phone? None! So for all prices greater than 50, Q=0. So the demand curve will jump across to Q=0. (and remain vertical as price increases above $50).
This supply curve is perfectly elastic (they don't always have to be, so don't get confused with the stuff i said about conatnt cost industries), so a horizontal line at P=10

[kinslayer]

is the area under a MC curve the total cost? or is MC at a q marginal to a base? or is MC accumulative?

The area under the MC curve up to some quantity Q is equal to the total variable cost for producing Q units. Fixed costs aren't relevant when considering decisions made at the margin (in the short run) and you can also see this by considering what happens to total cost at low levels of production (eg. Q=0 and Q=1).

From a calculus perspective, MC is equal to the rate of change of total cost, so its antiderivatives are exactly those functions that differ from average variable cost by a constant. The actual total cost curve is one of those functions, but when calculating the area (which is a  definite integral) the constant term is not relevant.

[Daenerys Targaryen]

The area under the MC curve up to some quantity Q is equal to the total variable cost for producing Q units. Fixed costs aren't relevant when considering decisions made at the margin (in the short run) and you can also see this by considering what happens to total cost at low levels of production (eg. Q=0 and Q=1).

From a calculus perspective, MC is equal to the rate of change of total cost, so its antiderivatives are exactly those functions that differ from average variable cost by a constant. The actual total cost curve is one of those functions, but when calculating the area (which is a  definite integral) the constant term is not relevant.

cheers man

just another qu

do we draw the supply and demand curves as stairs/steps when they use the words 'willing to spend up to' and a straght line when 'willing to spend only' ?

cheers guys

[|ll|lll|]

For part (c) of the question, am I right in saying that:
CS: A+B+C+D+F+G+H+J
PS: E+K
G'vment: -(E+F)

Not sure what the consumer and government surplus should be :/

[Reckoner]

For part (c) of the question, am I right in saying that:
CS: A+B+C+D+F+G+H+J
PS: E+K
G'vment: -(E+F)

Not sure what the consumer and government surplus should be :/

You're right about consumer surplus, as consumers can still buy computers at the world price.

Government is actually the -(E + F + K + the two other little areas below K and F). This is because the government is spending $2100 on 1100 computers (well, 1000 plus a little extra, you can see the intersection on the graph lets just say it intersects at 1100 just to make it easier). So the government spends 1100*2100 on computers, but gets no benefit from it. So the gov loses out on all of that 1100*2100, which is represented by the entire rectangle in the bottom left of the graph, below and including E+F. Actually, I'll just shade it on the graph, easier than explaining.

[Daenerys Targaryen]

do we draw the supply and demand curves as stairs/steps when they use the words 'willing to spend up to' and a straght line when 'willing to spend only' ?

bump this and:

is there a difference b/w substitute and perfect substitute?

[Reckoner]

^I'm not too sure about the stairs question, do you have an example of where the distinction comes up?

And yes there is. Goods that are perfect substitutes can be considered to be exactly the same. If they are perfect substitutes, consumers will only purchase the one that is cheapest. Even if the price of the more expensive good decreases a little, all consumers will still purchase the cheaper one. Imperfect substitutes will not be so extreme. As they aren't perfectly substitutable, there will still be some demand for the more expensive good. But if the price of the more expensive good decreases a little bit, consumers will move across to that good, even though it still is more expensive.

[Daenerys Targaryen]

theres one for each

thanks

[Reckoner]

Ahh ok. Basically don't worry about the distinction between the wording that you described. The distinction just comes from other factors, not that wording. In this case its the fact that everyone has the same preferences in the latter question, and that everyone will buy at most one. With the soft drink, you have different levels of quantity demanded at many prices, while with the phones, either everyone buys one or everyone buys none, so you only have 2 quantities 0 and 50.  The reason the latter one looks like "stairs" (well, one step) is just because everyone has the same preference and only wants one smart phone. See the explanation for how you get the demand curve a few points up.

You also have steps when looking at goods that are non-divisible (ie cant sell 1.5 of them).

When drawing the demand curves, just think "what quantity will people want to buy at this price".

Hopefully that answered your question?

[Daenerys Targaryen]

Yeah kinda, but having said that you cant buy 1.5 of something, why did the one about cans of drink become a straight line, because they cant be halved.

Anyway i just recieved an answer from the lecturer with the same question he said:

'Only do steps if the question essentially says this (like the price discrimination question for the monopoly)'

[Reckoner]

^Just because we normally assume that they can be halved, because straight lines are easier to deal with.